Climate tops proxy season in proposals, success rate

The proxy season now wrapping up sent a strong signal that investors expect companies to take climate change seriously.

Climate rose to the top of shareholders' agendas this season, in terms of both the number of shareholder resolutions and the rate of success.

This year, 10 climate-related shareholder proposals received majority support, compared with only three in 2020 and zero in 2019. There was an equally dramatic level of shareholder support for such proposals, averaging 52.6%, up from 38.5% the previous year, according to Institutional Shareholder Services' governance and research unit, which counted 24 such proposals this year, compared to 10 in 2020 and 12 in 2019.

Proposals seeking stronger disclosure of how a company's climate lobbying aligns with the Paris Agreement goals won majority support at Exxon Mobil Corp., Phillips 66 Co., Norfolk Southern Corp., United Airlines Inc. and Delta Air Lines Inc. Similar resolutions filed at CSX Corp., Duke Energy Corp., FirstEnergy Corp., Entergy Corp., General Motors Co. and Valero Energy Corp. were withdrawn when the companies agreed to disclose their climate lobbying activity.

A majority of Exxon Mobil shareholders also approved a proposal seeking disclosure of the climate change risks the company faces.

At Chevron Inc., 61% of shareholders backed a proposal calling for Scope 3 emissions reductions targets, while 48% voted to recommend that the company report on its climate-related financial risks.

While oil and gas companies were most often put in the spotlight to address cli- mate risks and how they will approach energy transition, other industries, including airlines and railroads, were not immune. Even Walmart Inc. got the message, through a resolution filed by Rhode Island Treasurer Seth Magaziner asking how it will reduce refrigerants that contribute to climate change. While the first climate-related refrigerant resolution won just 5.5% of the votes, it squeaks by the threshold for it to be considered next year.

"It has been a big year for climate," said Liz Gordon, executive director of corporate governance for the $254.8 billion New York State Common Retirement Fund, Albany.

"This proxy season saw a lot of movement. I think we are seeing real recognition by investors of the risk and opportunities. We are also seeing a growing response from companies who are also seeing the risk of not responding" to investors' concerns, Ms. Gordon said.

Just ask Exxon Mobil Corp.'s board directors. Frustration with the company's inaction addressing climate risk and energy transitions led New York State Common, the $469.8 billion California Public Employees' Retirement System, Sacramento, and $299.8 billion California State Teachers' Retirement System, West Sacramento, to back hedge fund firm Engine No. 1's winning bid to replace two of them with independent directors experienced in clear energy and energy transitions.

Investors are also getting significant backup from Washington. While they welcomed the Biden administration's move to rejoin the Paris Agreement among other signals, one game changer is expected to be new climate-related disclosure mandates from the Securities and Exchange Commission, with a proposal expected by October. The proposal is aimed at having companies disclose their level of climate-related risk and links to long-term financial prospects.

The White House also supports legislation passed by the House June 18 that would require public companies to disclose ESG metrics and how they connect with long-term strategies.

Any new SEC disclosure requirements would apply to public companies, but the private sector needs to get ready, to meet investor demand, said Elaine Chim, head of private equity for Americas and Asia-Pacific at Apex Group Ltd., a global financial services provider in New York. As sustainable investing grows, so does the push for better disclosure of strategies and results. "Investor pressure is definitely one driver. The other one is regulatory," said Ms. Chim, who expects U.S. regulators to follow a similar route now being taken in Europe, with mandated disclosure rules in the works.

On June 22, the U.K.'s Financial Conduct Authority proposed climate-related disclosure rules for public companies, money managers, life insurers and FCA-regulated retirement plan providers to align with existing Task Force on Climate-related Financial Disclosures standards.

In the U.S., "I think people are still picking and choosing what they want to disclose. When it's mandatory, it is going to be a challenge. From an investor perspective, if the SEC moves forward like its European counterpart, it should make it easier to compare across the board," Ms. Chim said. "It's not going to be without a fight."

Having all companies report their climate risks and strategies for dealing with them would be huge progress, observers say. "Investors are interested in having better standardization of reporting. That's an ongoing hot topic," said Dayna Harris, partner with Farient Advisors, a Los Angeles-based executive compensation and corporate governance consulting firm that helps companies, large public pension funds and mutual funds review proxies and prepare votes on executive pay packages.

"Your carbon footprint is a big deal" to investors, she said. When executive pay comes up, what companies are doing about climate risk "is a discussion point whether it should be considered. There is concern about whether companies are doing enough."

Christian Brothers Investment Services, Chicago, a $10 billion asset manager for Catholic institutions, wanted Exxon Mobil to produce an audited report on the financial impacts to the company under a net-zero emissions scenario by 2050. Initially hoping for 30% support for the first-time resolution, "we were ecstatic" with the near-majority vote of 48.9%, said Chief Investment Officer John W. Geissinger.

"I think this proxy season really reminded everyone that the shareholders are the owners. I think what we saw is shareholders of the company not only have a right but a responsibility to speak out," he said.

When it comes to climate risk and the energy transition, "we truly believe that these companies are going to be part of the solution. The proxies filed are to some extent encouraging the companies not to be a follower" but instead be proactive, said Mr. Geissinger, who anticipates more frequent shareholder demands on companies to do more. "We are going to keep asking," he said. While companies are not compelled to act on shareholder resolutions, regular ongoing engagement by investors is much harder to ignore.

This proxy season, investors also ramped up pressure on companies to make sure that their corporate stances on climate risk and lobbying activity line up. "The real change is going to come with policy change. That's why it's so important that their lobbying aligns with that," said Ms. Gordon of New York State Common. State Comptroller Thomas P. DiNapoli is trustee of the pension fund and has a goal to transition the portfolio to net-zero greenhouse gas emissions by 2040.

While there was a proliferation of shareholder proposals for climate-related lobbying disclosure this proxy season, perhaps the most dramatic result came from a shareholder proposal filed with Norfolk Southern Corp. by the Quaker investment firm Friends Fiduciary Corp.

It won support from 76.4% of voters for a report on if and how the company's lobbying activities, including through its trade associations, align with the goals of the Paris Agreement. While Norfolk Southern supports the Paris Agreement, its trade associations have lobbied against the agreement's goals on global temperature increases, and the company's board does not adequately oversee the misalignments, said Jeffery W. Perkins, executive director of the Philadelphia firm that manages $600 million in assets for 420 Quaker-affiliated organizations.

"We think if a company is saying something privately, they ought not to be doing something differently. It's something the industry has resisted," said Mr. Perkins, whose organization is part of the Interfaith Center on Corporate Responsibility's climate lobbying initiative. "The current engagement really reflects our sense of urgency around the climate risk, and business risks," he said.

Friends Fiduciary Corp. has always voted to uphold Quaker values, "but we also make the business case. The fact that large institutional investors were behind this, to me that sends an undeniable message to the company. I've seen the market move to where we have always been," Mr. Perkins said. He expects the level of urgency on climate-related lobbying "to do nothing but increase. Investors feel the need to make these changes now," he said.

Institutional shareholders saw some strong results this proxy season from resolutions expecting companies to take climate change seriously.